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Operations During Covid-19 Level 4

Our office is closed and all staff are working from home - business as usual. We can be contacted on our normal direct dial and mobile numbers and via email.  



 

Insights on Covid-19 #3

Retail Sector Aims for Recovery to a New Normal

The impacts of Covid-19 have been felt throughout the economy, in particular in the retail and hospitality sectors. Our 33 days in lockdown will have resulted in the loss of around $6.5 billion in retail and hospitality sales, a fall of more than 75 per cent. There is more pain to come for retailers with job losses and business failures likely, however our economic modelling suggests that we will see a strong recovery in the coming months, and many growth opportunities as consumer demand rebounds and restrictions are removed.

Bricks and mortar retail has been facing strong headwinds for years, with competition from online sources proving too much for many national chains and independent businesses. Now Covid-19 may be terminal for others. Already Burger King has been placed into receivership and Kikki.K into liquidation since late March.

Signs of a slowing retail market began back in February, well before the Level 4 lockdown, as tourist numbers began to decline and spending in many stores slowed. Paymark sales in apparel and department stores, cafes and restaurants were down by 10 per cent in mid-March compared to the same time in 2019, and by 40 per cent in the week before lockdown. Turbulent times for retail began long before our lockdown began, and will continue long after it ends.

The lockdown has been devastating for hospitality businesses and retailers that have little or no ability to sell products, either in store or online. Under Level 4 restrictions only supermarkets and dairies, service stations and pharmacies have been allowed to have physical stores open, and online sales are restricted to essential goods. Sales in non-essential stores have been less than 2 per cent of their normal levels over the last three weeks, with only very limited online purchases of essential goods generating any sales. Combine this with the already tough marketplace retailers were operating in, and many will be in a precarious position, even with government support and rent relief agreements.

Obviously, the experience of stores that have been allowed to be open has been much different. Pre-lockdown preparations saw strong sales of computers, appliances, hardware and household goods in the three weeks prior to lockdown as the more aware among us readied for a new normal. On the Monday the lockdown was announced, sales in the category were more than twice normal levels, while that increased to more than three times normal for the two days we were in Level 3, as consumers rushed to get their bubbles ready for a month at home.

Supermarkets also benefited from strong pre-lockdown spending, with sales since the end of February up 18 per cent from last year as home stockpiles grew. By mid-March sales had jumped 33 per cent from a year earlier, while in Level 3 supermarket sales were two to three times normal levels. During lockdown sales have been closer to normal levels, and it seems the lockdown of New Zealand’s hospitality sector, which generates over $12 billion a year in sales, has benefitted supermarkets very little. 

The long queues to enter supermarkets are more to do with physical distancing requirements and slow checkout throughput than vastly higher sales. During the lockdown supermarkets have processed half the transactions of the same period last year, while transaction size has more than doubled, as shoppers have fewer, but more expensive outings. 

So, what will be the new normal for the retail sector? That’s hard to say, but it won’t arrive as we head into Level 3 next week, with restrictions remaining unchanged on physical stores, and being relaxed only for contactless sales. Retail NZ has stated that up to 75 per cent of retailers have online channels and will be able to take advantage of eased restrictions. While many retailers may be able to reopen their stores next week and sales will increase from lockdown levels, our economic models suggest that sales will be around 60% lower than normal during Level 3, and will not reach anywhere near normal levels. The precarious position of many businesses in the sector will improve little during Level 3, most businesses will struggle, and some will fail.

It won’t be until we head back into Level 2, no earlier than the middle of May, that shoppers will be back in stores and some semblance of normality can return to the retail sector. By then foregone spending from the previous few months is likely to result in a short-lived bounce back in some stores’ sales. Many consumers will prepare for a possible second lockdown and others will purchase goods they missed while in lockdown.

However, any bounce is likely to be only short-lived, and in Level 2 Covid-19’s effects will still be obvious. Physical distancing requirements will remain, and the decimated international tourism industry, high unemployment and ongoing financial uncertainty will keep many shoppers away from the tills. Border restrictions will prevent almost all international tourism and associated spending, although a survey has shown that domestic holidays will be high on many wishlists once we leave Level 3. 

Overseas experiences post SARS and MERS indicate spend on less necessary goods such as clothing may be put off or abandoned as the recovery progresses, while spend that is less discretionary will quickly return to normal. Budget brand retailers are likely to benefit from more cautious spending, while online spending is likely to continue to grow as many consumers remain reluctant to venture out to physical stores. Our models indicate that even with that returning activity, sales while in Level 2 will still be 25% lower than normal, although that should be sufficient for most businesses to reopen and operate at a reduced capacity. Even when all restrictions are removed, it is likely that the sector will be impacted for many months.

New Zealand’s strong economy, and our decisive response to the virus leave us better placed than many other countries to support a recovery in retail spending. New Zealand’s hard lockdown is likely to result in a quicker release of restriction than many countries. In the short term, survival will be a key concern for our retail and hospitality businesses, while in the medium term financial uncertainty will be a challenge for businesses and require innovative responses for them to remain viable. This uncertainty and change will be our new normal for some time to come. However, compared to most countries there will be a more rapid and early return of demand which will create many opportunities in the coming months.

Derek Foy and Rodney Yeoman


   
 

Market Economics Ltd
Level 5, 507 Lake Road,
Takapuna 0740, Auckland, NZ
www.me.co.nz

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